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How To Trade Gold: Everything You Need To Start Gold Trading

When you think of wealth and opulence, you probably think of gold.

Gold is also seen as one of the most wanted investments, particularly during tough economic times.

The reason?

Gold is a very rare precious metal that is highly sought-after for jewellery and ornaments. It’s also the asset of choice for national banks of the wealthiest countries in the world, such as the Federal Reserve and the Bank of England.

Therefore, the price of gold tends to follow a steady growth trend in the global markets. Obviously, there are some fluctuations in price, but compared to other commodities and assets, it is less volatile.

Many traders like to hold gold as a commodity as it helps to diversify their portfolio and can help to protect against inflation.

Another appealing thing about investing in gold is that its market price has been historically less affected by economic instability than other commodities and stocks. In fact, gold is considered to be a ‘safe haven’ with the price often increases during times of recession and global bear markets.

What Is Gold Trading?

Gold trading simply refers to the buying and selling of gold in the hope of making a possible profit from its price fluctuations.

Over the short term, gold markets are fairly turbulent with daily price changes. Traders attempt to make a return on investment by purchasing the commodity when the price is low and selling when the price is high. Alternatively, they may use a spread betting method to bet on whether the price will rise or fall.

When trading gold, sensible traders develop a risk management plan to determine how much they are willing to lose, while trying to maximize potential gains.

What Factors Influence Gold Prices?

It is important to understand what causes the price of gold to change before you start trading in the commodity.

Below you will find some of the main factors that influence gold price movements in the markets.

US Dollar Value

Analysis of historical data and charts implies that gold prices have a tendency to move in the opposite direction to the value of the US dollar.

In other words, as the US dollar rises in value, gold becomes more expensive for buyers (unless they are using US dollars to buy gold). In contrast, a fall in dollar value means that gold becomes cheaper for buyers abroad and, in this case, the demand will also increase.

 

Inflation and Interest Rates

Inflation refers to rising prices of goods and items. The faster that prices are rising, the higher the inflation rate.

Interest rates have a direct effect on the rate of inflation. There are several central banks whose monetary policy decisions have a big impact on inflation. When banks such as the United States Federal Reserve and the European Central Bank (ECB) raise or reduce interest rates, it has a knock-on effect in terms of inflation.

When interest rates go up, people borrow less money and tend to spend less which means that inflation is also likely to rise, and vice versa.

High inflation has historically caused an increase in the gold spot price. In previous times of economic difficulty and high inflation, the precious metal has retained its value.

 

Physical Demand

Physical demand also affects the price of Gold. Gold is also used for other commodities, especially jewelry and expensive ornaments.

Therefore, when the economy is booming, demand for physical gold often increases, which can drive the price up. For this reason, gold has historically fared well during boom times, as well as economic slumps.

Investment Demands

Gold is usually considered to be a ‘safe haven’ for investors. During a time of great economic uncertainty, investors usually flock to gold to secure their assets and prevent them from suffering possible large losses.

Gold often retains or increases its value, regardless of political or economic events. The current economic uncertainties may mean that it is a good time to invest in gold. However, all investments carry a certain degree of risk and investors should perform their own analysis before buying any type of commodity or stock.

Investors can buy physical gold assets or use financial instruments tied to gold, such as ETFs (Exchange-Traded Funds). More on this later.

Mining

The rate at which Gold is mined can affect gold prices. The supply is reduced if companies cannot mine the required amount due to complications such as extreme weather conditions or political problems.

Around 3,500 tons of gold are mined annually, and an additional 1,200 tons are recovered from recycling.

The United States was the major holder of gold, mostly in its central bank (US Federal Reserve), followed by Germany, Italy, France, and Russia. South Africa was also known for its high amount of gold but has since been far behind compared to other countries.

How To Trade In Gold

To trade in gold, you first need a trading account with a brokerage or trading exchange. You can access everything you need to set up a trading account and learn how to trade gold at TradeEU.

Gold ETFs

Trading in ETFs (Exchange-Traded Funds) is one of the most popular ways to trade gold. The reason for their popularity is that ETFs make it simple to trade gold, while still offering diverse trading options. ETFs allow you to trade in the price of gold or trade in shares related to gold mining and production companies. ETFs typically offer good levels of liquidity and they don’t expire (unlike gold futures).

ETFs are publicly listed funds designed to track the movement of prices of several assets or indexes of stocks. Gold ETFs are simply dematerialized units that represent physical gold. In other words, one gram of gold is equal to one gold ETF unit backed by the value of the physical gold.

Make sure that you don’t confuse ETFs with Unit Investment Trusts (UITs) which use a similar trading mechanism, but rather than being a fund backed by gold, a UIT actually owns the physical gold.

You should know that buying and selling ETFs will require a commission and possibly a management fee if you decide to hold them. It is also worthwhile noting that some gold ETFs may suffer from illiquidity, which impacts the ability to buy and sell them.

Gold Futures

Another method of investing in gold is through the use of a futures contract. A futures contract is an agreement by one party to buy shares and sell them at a fixed date in the future.

Futures contracts allow investors to speculate on the future price of gold. Investors buy stock when they expect the gold value to increase in the future in order to make a profit when they sell them.

Gold futures are traded on three main regional markets:

  • OTC (Over-The-Counter) markets between dealers, brokers, and banks in London, United Kingdom,
  • The COMEX (Commodity Exchange) division of the New York Mercantile Exchange (NYMEX) which is based in the United States,
  • The Shanghai Gold Exchange (SGE) which is based in China.

Gold futures traders can be traded 23 hours a day during the trading week.

The downside of gold futures contracts is that they will eventually expire, and you will be forced to sell, which makes it no good for traders looking to invest over a longer term. Typically, traders need a higher amount of capital to make a potential profit from futures, as the contracts often stipulate a minimum investment amount.

Gold Mining Shares

Another popular way to trade gold online is through the use of gold mining shares. It involves buying and selling shares in gold mining companies. Buying gold mining shares means you do not need to worry about storing the physical commodity at your property or in a bank vault. Gold mining shares can be bought and sold on a trading exchange.

Gold Options

Gold options allow people to gain a trading position in gold for a lower monetary investment than other methods, making it less capital-intensive to start investing in gold. Gold options use contracts which involve gold futures or physical gold assets.

Gold options are split into “calls” and “puts”.

  • Call options allow traders to buy gold at a certain price (strike price) before the option expires. If the gold price rises then you make a profit. If the price falls, you lose the amount that you paid initially for the option (known as the premium).
  • Put options allow traders the right to sell gold at a certain price (strike price) before the option expires. If the price of gold falls before the option expires, then you make a profit equal to the difference between the current price and the strike price, minus fees. If the price of gold rises, then you lose your premium.

Gold CFDs

Gold CFDs, or Contract for Difference, are another popular way to trade in gold. CFDs are known as derivatives, and they allow you to trade using a margin which gives you a higher amount of exposure to the gold market.

CFDs are contracts that give you the opportunity to buy and sell units based on your prediction of whether the market will rise or fall. Gold CFDs have a number of benefits including the fact that they are exempt from stamp duty and allow you to trade in fractions, rather than the full value of the trade.

Trading gold CFDs means a trader never actually owns the asset. CFDs also allow traders to take a position for a relatively long period of time, ranging from days to months. It is important to note that traders trading Gold CFDs will incur swap fees.

A trader can profit from rising and falling prices by using CFDs to go long or short. A trader taking a long position would mean they’re speculating the price will go up and taking a short position when they predict that the price will fall.

Gold Bullion

Some investors just prefer to invest in physical assets and buy up actual gold stock. Many investors buy gold as a hedge against inflation, economic instability, and stock market turbulence.

Trading physical metal is straightforward since options are limited. Gold is bought and sold in a traditional way through a gold dealer or collector. There are some online dealers that deal in gold.

Gold Trading Strategies

It is important to develop some well thought out gold trading strategies and techniques before you get involved in buying and selling gold. Here are some of the main strategies and techniques commonly used by gold traders.

News Trading

News trading refers to basing your trading decisions on news reports, announcements, and updates. For instance, annual central bank interest rate releases, policy statements and quarterly mining reports.

Day Trading

Day traders buy and sell according to short-term daily trends and price fluctuations.
Gold is a highly liquid asset with small spreads between bids and ask prices. Day traders hold a position for a single trading session and they may also apply news trading techniques to get a heads-up on the market.

Trend Trading

Trend traders use gold market momentum to their advantage by opening a position at the early signs of a trend, then selling when a trend reversal looks likely. Looking for patterns in the gold market and identifying trends help them to make informed and calculated decisions. If the price is experiencing an upward momentum in price, traders can use technical analysis to predict its continued momentum based on historical data.

Position Trading

Position trading is a simple method of trading. Traders keep a trading position open in the possibility of profiting from continued gold price changes over a longer period of time.

Price Action Trading

Before entering a position, traders study the recent and current price movement to decide when to enter a position and predict when to exit a position. The price study usually goes back a few months only.

Scalping

Scalping involves placing trades based on tiny price movements to make a lot of frequent small profits, rather than waiting for large-scale trends.

Gold Trading Hours

You can trade gold 23 hours a day, but many gold traders (especially day traders) like to trade at times of the day when the price of gold is more likely to move in a favorable direction.

The “best” trading hours will depend on whether you’re trading futures or spot prices. The data suggest that the gold markets show the most price movements between 12 pm and 8 pm London (UK) time.

TradeEU allows you to trade spot CFDs and monitor gold prices as well. Sign up for an account to access a range of tools and resources to improve your gold trading.

Frequently Asked Questions

Is gold a good investment?

Gold is considered a haven amongst investors and traders. Historical data shows it to be stable in value with less potential of crashing during times of economic instability.

Trading gold serves as a utility against inflation and is considered to be good for portfolio diversification. However, all trading comes with an inherent risk and profit cannot be guaranteed.

What is gold investment?

Gold investment is when an individual purchases gold or gold-backed contracts, in order to make a potential profit. Gold investment may be done over the long-term or short-term, depending on the goals and risk tolerance of the individual investor.

What is the most popular way to invest in gold?

The most popular depends on how long you want to invest for and the level of risk you’re willing to accept. A short-term investor, such as a day trader, may prefer to invest using CFDs. Longer-term investors may prefer to invest in physical gold to safeguard their assets.

Is Gold safer than cash?

Most people hold the view that gold is “safer” than cash. Gold is separated from the current banking system and its value has historically appreciated over time. Cash value is based on the current foreign exchange price. A currency can crash during tough economic times, which can reduce its value considerably.

What is the average return on gold?

The average return depends on how you choose to invest it. If you choose to buy physical gold, the current price trend will decide how much you gain or lose over time.

Unlike stock and currency trading, the return on gold is dependent on its price appreciation or depreciation.

To give you an indication of potential returns, the average annual return on gold worldwide was 10.61% between 1971 and 2019.

What is the highest price of gold in history?

The highest price of gold in history was $2,075 per troy ounce in 2020 at the height of the COVID-19 pandemic.

References:
Gold Trading | How to Trade Gold | Capital.com
Online Gold Trading: A Guide on How to Trade Gold (admiralmarkets.com)
https://www.investopedia.com/articles/investing/100915/learn-how-trade-gold-4-steps.asp
https://www.investopedia.com/articles/basics/08/invest-in-gold.asp

Questions & Answers

What account types does TradeEU have?

We offer 3 types of trading accounts. Click here to see all details of our Silver, Gold and Platinum account types.

Glossary

LIQUIDITY

Market liquidity refers to a market's ability to allow assets to be bought and sold easily and quickly. If an asset has high liquidity it means that many people are buying and selling it.